Don’t Give Your Adult Children Your House

By Gerry W. Beyer

Gifting a house outright to your adult children or adding them to the property’s deed may avoid the hassle of probate, but doing so may bring along its own slew of issues. These problems range from a potentially large tax bill to the house being in danger if the child files for bankruptcy.

Sometimes parents transfer a home to their child to try to qualify for Medicaid, the government program that pays health care and nursing home bills for the indigent. But gifts or transfers made within five years of applying for Medicaid can lead to a penalty period when seniors are disqualified from receiving benefits.

If an adult child is gifted a house through inheritance or a will, they will also get a “step-up in tax basis.” Meaning the value of the house upon the conveyance will not be based on the date they acquired it, but rather when the previous owner acquired it. Kenneth Robinson of Rocky River, Ohio had a client that received his mother’s house as a gift – against his advice – prior to the mother’s death. The mother purchased the house in 1976 for $16,000, but the son acquired the property with a market value of $200,000 with a tax bill of $32,000 because of the $184,000 gain.

However, Section 2036 of the Internal Revenue Code says that if the mother retained a “life interest” in the property, which includes the right to continue living there, the home would remain in her estate rather than be considered a completed gift. There are specific rules for what constitutes a life interest, including the power to determine what happens to the house and liability for its bills. The executor of the person would then file gift tax return on the deceased’s behalf to show that the recipient was given a remainder interest, or the right to inherit at the person’s death.

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Enjoy reading, “Don’t Give Your Adult Children Your House”? Check out our previous post: Business Valuations: An Estate Planning Necessity

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William Hayes

As an attorney in private practice in Los Angeles County, California William Hayes provides extensive estate and tax planning services to individuals and businesses in Los Angeles, Pasadena, Glendale, Burbank and surrounding communities. Attorney Hayes’ primary focus is to help clients avoid probate, protect their assets, and provide for the security of their loved ones with a well-crafted estate plan. He believes in giving each client the time needed to explain his or her needs and wishes and then dedicates his efforts toward making the client’s desires clear in their final estate plan.

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